HOUSE OF COMMONS
Fifth Standing Committee on Delegated Legislation
VALUE ADDED TAX (PAYMENTS ON ACCOUNT) (AMENDMENT) ORDER 1996
Thursday 16 May 1996
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The Committee consisted of the following Members:
Chairman: Sir Giles Shaw
Austin-Walker, Mr. John (Woolwich)
Bruce, Mr. Malcolm (Gordon)
Cann, Mr. Jamie (Ipswich)
Cash, Mr. William (Stafford)
Chapman, Sir Sydney (Chipping Barnet)
Church, Judith (Dagenham)
Eagle, Ms Angela (Wallasey)
Fabricant, Mr. Michael (Mid-Staffordshire)
Fox, Dr. Liam (Lord Commissioner to the Treasury)
Grant, Sir Anthony (South-West Cambridgeshire)
Heathcoat-Amory, Mr. David (Paymaster-General)
Lloyd, Sir Peter (Fareham)
Mahon, Alice (Halifax)
Pearson, Mr. Ian (Dudley, West)
Porter, Mr. David (Waveney)
Primarolo, Dawn (Bristol, South)
Purchase, Mr. Ken (Wolverhampton, North-East)
Taylor, Sir Teddy (Southend, East)
Wilshire, Mr. David (Spelthorne)
Mr. J. D. W. Rhys, Committee Clerk1 Fifth Standing Committee on Delegated Legislation Thursday, 16 May 1996
[SIR GILES SHAW in the Chair]
The Paymaster General (Mr. David Heathcoat-Amory): I beg to move, That the Committee has considered the Value Added Tax (Payments on Account) (Amendment) Order 1996 (S.I., 1996, No. 1196). It may be helpful to the Committee if I provided the background and reason for introducing the order. Committee members will know that the payments on account scheme requires businesses that have a total annual VAT liability of £2 million or more to make payments on account of their VAT liabilities by monthly instalments. There are approximately 2,300 businesses in the scheme. It was introduced in October 1992 to protect the public sector borrowing requirement from the effects of single market changes to the system for accounting for VAT on acquisitions from the EC. Previously the VAT on such acquisitions was payable within a maximum of six weeks of entry into the UK. Under the new arrangements for acquisitions, this VAT is now accounted for on the VAT return, which delays the remittance of the moneys to the Exchequer by up to three months. That delay would have increased the PSBR in the year of introduction by approximately £1½ billion. The POA scheme was introduced to advance a similar amount to protect the PSBR. Currently the scheme protects the PSBR to the tune of £1.9 billion. In the previous Budget, the Chancellor announced that, following consultation with business, we are introducing changes to the scheme. They will reduce the amount required under the POA scheme from one twelfth of the annual liability per month to one twenty-fourth. Secondly, the concession of the seven-day extension to due date for payments by credit transfer will be removed. Thirdly, all payments of POA and VAT return balances will have to be paid by electronic means. That is now in the Finance Act 1996. Fourthly, a default surcharge for late or non-payment of POA will be introduced. Again, that is now in primary law. Finally, we shall allow businesses to opt to pay the actual liability rather than the set amount of POA. That represents a balanced package. It gives a cash flow gain to businesses of up to £3 million a year, with a corresponding cash flow loss to the Government, from the reduction of POA, while we are maintaining the protection of the PSBR—the reason for introducing the scheme in the first place—by the requirement to make earlier payments. The introduction of the changes is timed for June 1996 to give businesses time to adjust their accounting systems to cope with the requirement for earlier payments. 2 Inevitably, as payments are brought forward from April to March there will be a one-off gain to the PSBR in the first year-1996-97—of £600 million. Thereafter, the POA scheme will protect the PSBR to current levels of approximately £1.9 billion.
Ms Dawn Primarolo (Bristol, South): I want to ask the Paymaster General a few brief questions. He mentioned that the benefit in cash flow to 2,300 businesses would be around £3 million, but I thought that the figure was £35 million.
Mr. Heathcoat-Amory: I apologise to the hon. Lady and the Committee. I made a mistake—the figure should indeed have been £35 million.
Ms Primarolo: That proves that I was listening. The point is important because the seven-day extension on the due date for payment by credit transfer has been removed. I wanted to discover whether there would be checks and balances in the form of other benefits. The Minister mentioned consultation with business. Will he comment on the fact businesses have no right of appeal against customs decisions on, for example, the monthly amount payable or the revocation of an election to pay by the monthly liability? What do businesses think of that? Why did customs think it necessary to retain those powers without the right of appeal? My final question concerns the problems that we are experiencing with VAT revenue generally and, in particular, the substantial drop in income that is collected from VAT. How will customs cross-reference and tie in the new scheme with the development of its risk information system to ensure that a hole does not develop down which more VAT might disappear? This is an on-going matter, and the Minister need not give detailed answers now. I should, however, be grateful if he would write to members of the Committee.
Sir Teddy Taylor (Southend, East): Will the Minister briefly explain why on earth we are making the changes? I was interested to hear him refer to changes in European Union arrangements, but those are not directly relevant to the decision. As far as I can see, the Government are simply saying that people will have to pay their money earlier, but that the amount will be smaller. There will apparently be no change for the Government. The only difference is that there will be a once-and-for-all boost to revenue in 1996–97. The Government are approaching election time and perhaps trying to make things look nice. It would be terrible if they made the change simply to boost their finances in 1996–97. My first question is, therefore, why are we making the changes at all—the Minister has given no explanation? He has referred to consultations with business, which presumably means talking with many people. The Government have said that there will be no real change overall, except that people will have to pay a little extra advance money in 1996–97. Why are we doing that? My second question was raised by the hon. Member for Bristol, South (Ms Primarolo). Why has VAT revenue gone down, when people are supposed to be spending so much money? Local sales people in my constituency who 3 sell cigarettes to help the third world in Southend-on-Sea tell me that their revenue is down by 50 per cent. They tell me that people go over to the continent on shopping trips and bring back vast amounts of cigarettes and alcohol because of the new and remarkable arrangements that we have with the EU—unfortunately duty is lower on the continent and people buy such goods there. When the Single European Act was passed—I voted against it for reasons that are now obvious, and I am sure that most people wish that they had too—the Government committed themselves to the harmonisation of indirect taxation. That has, however, never happened and, as a result, there is a huge gap. The order is important, but I have two questions. First, why is the change necessary? Secondly, will the boost for 1996–97 arise—you are right, Sir Giles, we must refer only to this order—simply because there has been a diminution in VAT revenues? People beyond Parliament are entitled to know. Are the Government trying to give themselves a once-for-all boost because VAT revenue has fallen and is it falling simply because of the dreadful problem affecting Southend-on-Sea and other places where people buy things on the continent and come across by ferry or, sometimes, via the very costly tunnel? Why are we adopting the measure? Is it just to create a boost because of the reduction in VAT revenue? Why on earth is it happening?
Mr. Ian Pearson (Dudley, West): I too, have a fair suspicion that a £600 million one-off boost in the run-up to an election year is highly useful. However, I find it difficult to believe in netting off, whereby the amount that companies must pay is halved and the seven-day concession removed. Perhaps the Minister could confirm that the figures net off. What sort of sums are we discussing? The issue must have been modelled and calculated. Secondly, how many of the 2,300 companies in the scheme has been assumed will pay on an actual liability basis? How will that affect the overall figures?
Mr. William Cash (Stafford): We should be grateful for the £600 million boost and not too cynical about it, but will the Paymaster General reflect on the fact that it will be set against other VAT problems? Such problems are contingency legal issues, such as the retail trade VAT mess up and the repayments which are likely to be due on company cars. If the figures are remotely accurate, those problems make the £600 million pale into insignificance. Presumably, the Paymaster General would agree that such matters must be taken into account in the run-up to the November Budget. Despite a jocular aside that the Paymaster General made before we began our proceedings, the Budget has an enormous amount to do with monetary union; the problem is part and parcel of the desire to move to a uniform fixed rate of VAT under article 10 of the own resources decision—a critical problem. The day before yesterday, the Financial Times informed us that the November Budget, to which the issue directly relates, will be designed on the basis that monetary union will come into effect on 1 January 1999, How can we claim with any credibility that we have 4 managed to boost our receipts—about which I am glad—when there is a £10 billion shortfall on the PSBR, which the Chancellor of the Exchequer has already admitted is a serious mistake? During "On the Record" the other day, he had the temerity to say that he was glad that I was not the Chancellor of the Exchequer. The problem is compounded by the BSE issue, in which my right hon. Friend the Paymaster General is engaged in his constituency. The VAT issue must be weighed against the critical situation that we face in regard to our budget. I wish the Government well in all matters, both domestic and European, but unless we grasp the nettle and face the fact that this is but a minor blip in improving our economy and is really a form of creative accounting, we will be unable to resolve the question of our promises to the electorate in our last manifesto—we have increased taxation substantially and we must rectify that. My urgent advice to the Minister, the Government, the Chancellor of the Exchequer and everyone else is that we should sort out the monetary union question and not duck it any longer. It should be put on the intergovernmental conference agenda, as well questions on the fixed uniform rate of VAT.
Mr. Heathcoat-Amory: The hon. Member for Bristol, South (Ms Primarolo) is right that, as things stand, there is no right of appeal against a decision by Customs and Excise to revoke a trader's option to pay the liability. Customs and Excise is considering advice to Ministers with a view to making this an appealable matter under section 83 of the Value Added Tax Act 1994. It will make a recommendation to Treasury Ministers in due course. The questions raised by my hon. Friend the Member for Southend, East (Sir T. Taylor) touched on the revenue effects. He is quite right that this is an overall package for business. Businesses will have to pay seven days earlier by electronic transfer. I should say in passing that seven-day concession was given some years ago to encourage businesses to make use of that means of payment. It has now become widespread: electronic transfer has pretty well taken over from paper transactions, especially for big payers. So it is reasonable to withdraw that concession in return for the substantial benefit of having to pay only half as much by means of payments on account. That will give this group of traders a £35 billion net cash-flow benefit. Revenue will not be higher overall. This is not a revenue raising measure: it deals with how revenue is raised and when. These businesses account quarterly, so in the months between quarters they will make payments on account and the balancing quarterly figure will be paid as part of their quarterly returns. The quarterly payments will not alter over the three months as a whole. I have been told that I said £35 billion. I apologise to the Committee: at this time of year we occasionally get our noughts confused. It is a £35 million benefit to this group of traders on a cast flow basis. That is the last time I will mention that figure. We consulted widely about this measure. The generality of the trading community recognised the fairness of it. Incidentally, we consulted last year well before the recent figures showing a VAT undershoot, so there was no question of cobbling this measure together to get a timing or revenue advantage for the current year. 5 My hon. Friend the Member for Stafford (Mr. Cash) asked about the effect of VAT receipts in general on the PSBR. There have been court cases, some of which are outstanding. Customs and Excise won the case about whether it had been right to block input tax on business cars. It is appealing in the case about credit that my hon. Friend mentioned, so I cannot say any more about that, except to note that many of the figures bandies about in the press were ludicrous exaggerations. Each newspaper and each firm of accountants bid up the last figure they had heard and some of the figures mentioned were way above even the most ambitious and authoritative estimates. Nevertheless, the legality of VAT receipts is a serious issue and we are aware of a number of court cases still outstanding. On the underlying reason for the level of VAT receipts, I can assure my hon. Friend the Member for Southend, East that VAT receipts are up—the question is whether they are up as much as one would expect at this stage of economic recovery. He said that cross-border shopping was a possible cause of reduction in VAT; that may be a factor, but it would not account for a substantial sum. Other people speculated that it is to do with the balance between VAT-able and zero-rated or exempt goods. The Treasury is considering that so that the estimates in the forthcoming Budget will be as accurate as possible. The hon. Member for Dudley, West (Mr. Pearson) asked me about the payment of actual liability: it will be available to help the many businesses that experience large seasonal fluctuations. We anticipate that perhaps 50 of the 2,300 such businesses may take it up. Under the present one-twelfth rule, if a company's VAT receipts drop significantly during the winter months, for example, it could find itself paying on account more than its actual liability. Halving that to one twenty-fourth avoids that difficulty so that businesses will not pay more than their actual liability even when they face seasonal fluctuations. However, they still have the option of calculating their computed liability on a month-by-month basis and some of them may wish to do that. I hope that that covers all the points made; I will respond to any others.
Ms Primarolo: One question that the Paymaster General has not dealt with is that relating to the disappearing VAT receipts. I disagree that we are not receiving fewer VAT receipts. This is not the place to discuss why—we shall have other opportunities to do so—but one of the reasons is increasing avoidance, which is an apparently legitimate activity. I asked my earlier question on the risk information system and on whether that had been cross-referenced and a judgment made because I want to be sure that the proposals do not give clever accountants and lawyers an opportunity to bring cases to avoid VAT or to get more VAT reimbursed. In every discussion about disappearing VAT revenues— 6 which the Paymaster General has mentioned in other debates—the risk assessment information system is always mentioned. I presume that the order has been measured against that risk assessment and I again ask the Paymaster-General to tell the Committee today or in writing the basis on which that has been done and to reassure us that the legislation will not be used to get back-dated VAT.
Mr. Pearson: I was hoping to hear two figures from the Minister: I got one, that of the 50 out of 2,300 businesses that might take advantage of the actual liability scheme. I am not surprised that so few businesses will be involved because if one does not have a seasonal business there are obvious cash flow advantages in choosing other options. The figure that I did not get, however, was that of the cost to the Exchequer of moving to twenty-fourths from twelfths. I understand that that is supposed to balance the removal of the seven-day concession, but I want to know what sum is involved.
Mr. Heathcoat-Amory: The figure of £35 million is a net figure. The balance is between requiring business to pay earlier, which is of some advantage to the Exchequer, and reducing the monthly payment-on-account figure, which benefits business rather more. The net amount is an overall annual figure of up to £35 million for that group of traders, of which, as I said, there are some 2,300. As to compliance, they are a generally compliant trading community. They are the big payers, whom Customs and Excise knows well. Their affairs are given appropriate attention because of the size of their liabilities. They are, of course, in the scheme only if their VAT liability is £2 million or more and if they submit quarterly VAT returns. The order will have no effect on avoidance or enforcement. I stress that they will all make—as they do now—quarterly VAT returns, which will be audited and examined by Customs and Excise as appropriate. How customs organises its affairs to stop evasion and avoidance is the subject for a different debate. I shall mention only in passing that avoidance is legal. However, avoidance schemes that are expensive to the Revenue attract our attention in the annual Budget round. The hon. Member for Bristol, South will know that in the Finance Bill that we have just enacted, we put a stop to a large avoidance scheme connected with VAT and groupings. That is a good example of our taking legislative action to put a stop to an intolerable development. We shall continue with the same attitude.
Question put and agreed to.
Resolved, That the Committee has considered the Value Added Tax (Payments on Account) (Amendment) Order 1996 (S.I., 1996, No. 1996).
Committee rose at two minutes to Eleven o'clock.7
THE FOLLOWING MEMBERS ATTENDED THE COMMITTEE:
Shaw, Sir Giles (Chairman)
Fox, Dr. Liam
Lloyd, Sir Peter
Porter, Mr. David
Taylor, Sir Teddy8